If you have changed jobs a few times, the chances are you have picked up several pension pots along the way. Keeping track of them all can be a headache, and it is easy to lose sight of how much you have and how well it is invested. Pension consolidation, bringing several pots together into one, can make your retirement savings simpler to manage. The following pension consolidation tips explain how it works, when it makes sense, and the risks to weigh up first.
Consolidating is not automatically the right move for everyone, so the aim here is to help you understand the trade-offs before you make any decisions.
What is pension consolidation?
Pension consolidation means transferring several pension pots into a single, easier-to-manage plan. It is usually done either by opening a new pension and moving your existing pots into it, or by transferring older pensions into one you already hold. The result is one pot, one provider, and one set of paperwork to keep on top of.
Why consolidate your pensions?
Combining your pensions can offer several advantages:
- Simplicity: managing one pot is far easier than juggling several, with less paperwork and a clearer view of your savings.
- Potential cost savings: bringing pots together can reduce the number of separate charges you pay, though this depends on the plans involved.
- Wider investment choice: a single modern plan may give you access to a broader range of investments suited to your goals and attitude to risk.
- Easier oversight: with everything in one place, it is simpler to monitor performance and make adjustments as your plans change.
When consolidation may not be right for you
Consolidation is not always the best option, and some older pensions are worth keeping exactly where they are. Check these points carefully before moving anything:
- Exit fees and penalties: some older pensions charge a fee to transfer out, which can eat into the benefit of moving.
- Valuable guaranteed benefits: certain pensions, particularly defined benefit (final salary) schemes and some older plans, carry guarantees such as guaranteed annuity rates. These can be extremely valuable and are usually lost on transfer.
- Small pots: for a very small pension, the effort and cost of transferring may outweigh the benefit.
- Tax and risk: make sure any new plan matches your attitude to risk and that you understand any tax implications.
Because of these risks, transferring a defined benefit pension almost always requires regulated financial advice, and it is sensible to take advice on any transfer where guarantees may be at stake.
How to consolidate your pensions in five steps
If, having weighed it up, consolidation looks right for you, the process is straightforward:
- Step 1, gather information: collect statements and details for each of your current pensions.
- Step 2, compare and check: look at each plan’s fees, performance and, crucially, any guaranteed benefits you could lose.
- Step 3, choose the right plan: decide which provider and type of plan, for example a personal pension or a SIPP, best fits your goals.
- Step 4, initiate the transfer: complete the paperwork to move your pots into your chosen plan.
- Step 5, review your new plan: once the transfer completes, check the consolidated pension is invested in line with your goals.